Friday, November 27, 2009

Extreme belief in market similar to extreme beliefs in the State?

It’s a bit childish, but it’s also fun to see a ridicule or teasing wrapped up in an academic argument. The short and blunt version: “Ha ha! Modern macro is doing the same thing as the planned economy guys they (rightly) think are stupid. That means the modern macro guys are stupid as well!”

The argument is an interesting and (I think) insightful analogy that bunches the free-market macroeconomists in with old-style planned-economy advocates that they are politically opposed to :-)

In the old debates about planned vs. market based economies, the “libertarian” economist Friedrich Hayek (who believed on theoretical grounds any intervention in the market would set in motion a slippery slope to totalitarianism) argued the importance of information: Prices, emerging in free markets, were the only way of gathering the often tacit knowledge of market participants into a form that communicated the relative values of various uses of a resource. A lack of market-based prices meant ignorance regarding the value of resources, and misallocation of capital and manpower etc.

Keeping this in mind, it is fun to see the argument that modern representative agent macroeconomics make the same mistake as the advocates of planned economies. Both ignore the importance of dispersed knowledge, over-emphasize the ease with which information/data can be gathered and provide a true and total picture of the world, and base their work on one or more agents having this total understanding of the world (the central planner, or the representative agent).

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